Question 1

Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.

Accepted Answer

A)  10.6% 
B)  12.1% 
C)  13.6% 
D)  14.0% 
E)  16.2% 
A)  10.6% 
B)  12.1% 
C)  13.6% 
D)  14.0% 
E)  16.2% D

Question 2

Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) $$\begin{array} { c c c } 
\text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \
\hline \mathbf { X } & - 0.55 & 1.2 \
\mathbf { Y } & - 0.10 & 0.85 \
\mathbf { Z } & 0.35 & 0.5
\end{array}$$ 
The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7-8. The expected prices one year from now for stocks X, Y, and Z are

Accepted Answer

A)  $53.55, $54.4, $55.25 
B)  $45.35, $54.4, $55.25 
C)  $55.55, $56.35, $57.15 
D)  $50, $50, $50 
E)  $51.35, $47.79, $51.58. 
A)  $53.55, $54.4, $55.25 
B)  $45.35, $54.4, $55.25 
C)  $55.55, $56.35, $57.15 
D)  $50, $50, $50 
E)  $51.35, $47.79, $51.58. A

Question 3

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

Accepted Answer

A) True 
 B)False  True

Question 4

Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) $$\begin{array} { c c c } 
\text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \
\hline \mathbf { X } & - 0.55 & 1.2 \
\mathbf { Y } & - 0.10 & 0.85 \
\mathbf { Z } & 0.35 & 0.5
\end{array}$$ 
The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7-8. Assume that you wish to create a portfolio with no net wealth invested and the portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. What is the net arbitrage profit?

Accepted Answer

A)  $8 
B)  $5 
C)  $7 
D)  $12 
E)  $15 
A)  $8 
B)  $5 
C)  $7 
D)  $12 
E)  $15

Question 5

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the

Accepted Answer

A)  Security market line. 
B)  Capital asset pricing model. 
C)  Characteristic line. 
D)  Line of least resistance. 
E)  Market line. 
A)  Security market line. 
B)  Capital asset pricing model. 
C)  Characteristic line. 
D)  Line of least resistance. 
E)  Market line.

Question 6

Studies have shown the beta is more stable for portfolios than for individual securities.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 7-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6% with a standard deviation of 13% and a beta of 1.3. The market risk premium for this period of time was 6% and the risk-free rate of return was 5%.
-Refer to Exhibit 7-6. Based on the Capital Asset Pricing Model (CAPM), what is the required rate of return for this portfolio?

Accepted Answer

A)  6.3% 
B)  7.8% 
C)  10.6% 
D)  12.8% 
E)  15.4% 
A)  6.3% 
B)  7.8% 
C)  10.6% 
D)  12.8% 
E)  15.4%

Question 8

Consider a two-factor APT model where the first factor is changes in the 30-year T-bond rate, and the second factor is the percent growth in GNP. Based on historical estimates you determine that the risk premium for the interest rate factor is 0.02, and the risk premium on the GNP factor is 0.03. For a particular asset, the response coefficient for the interest rate factor is -1.2, and the response coefficient for the GNP factor is 0.80. The rate of return on the zero-beta asset is 0.03. Calculate the expected return for the asset.

Accepted Answer

A)  5.0% 
B)  2.4% 
C)  -3.0% 
D)  -2.4% 
E)  3.0% 
A)  5.0% 
B)  2.4% 
C)  -3.0% 
D)  -2.4% 
E)  3.0%

Question 9

Calculate the expected return for D Industries which has a beta of 1.0 when the risk free rate is 0.03 and you expect the market return to be 0.13.

Accepted Answer

A)  8.6% 
B)  9.2% 
C)  11.0% 
D)  12.0% 
E)  13.0% 
A)  8.6% 
B)  9.2% 
C)  11.0% 
D)  12.0% 
E)  13.0%

Question 10

Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (λS1U1B10S1U1B0) = .025 and the risk premiums for the two factors are (λS1U1B11S1U1B0) = .12 and (λS1U1B10S1U1B0) = .10.
 $\begin{array}{ccc}
\text { Stock } & \text { Factor } 1 b_{i l} & \text { Factor } 2 b_{i 2} \
\hline \text { A } & -0.25 & 1.1 \
\text { B } & -0.05 & 0.9 \
\text { C } & 0.01 & 0.6
\end{array}$
-Refer to Exhibit 7-9. Calculate the expected returns for stocks A, B, C. $\begin{array}{lccc} 
& \mathrm{A} & \mathrm{B} & \mathrm{C} \
\hline  \text { I. } & 0.082 & 0.091 & 0.033 \
\text { II. } & 0.105 & 0.109 & 0.032 \
\text { III. } & 0.132 & 0.128 & 0.033 \
\text { IV. } & 0.165 & 0.121 & 0.032 \
\text { V. } & 0.850 & 0.850 & 0.610
\end{array}$

Accepted Answer

A)  I 
B)  II 
C)  III 
D)  IV 
E)  V 
A)  I 
B)  II 
C)  III 
D)  IV 
E)  V

Question 11

Beta is a measure of unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 12

Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):

Accepted Answer

A)  A quadratic utility function. 
B)  Normally distributed returns. 
C)  The stochastic process generating asset returns can be represented by a factor model. 
D)  A mean-variance efficient market portfolio consisting of all risky assets. 
E)  All of the above 
A)  A quadratic utility function. 
B)  Normally distributed returns. 
C)  The stochastic process generating asset returns can be represented by a factor model. 
D)  A mean-variance efficient market portfolio consisting of all risky assets. 
E)  All of the above

Question 13

Using the S&P/TSX composite index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

Accepted Answer

A) True 
 B)False

Question 14

The capital market line is the tangent line between the risk free rate of return and the efficient frontier.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 7-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You expect the risk-free rate (RFR) to be 3% and the market return to be 8%. You also have the following information about three stocks. $$\begin{array} { c c c c c } 
\text { STOCK } & \text { BETA } & \begin{array} { c } 
\text { CURRENT } \
\text { PRICE }
\end{array} & \begin{array} { c } 
\text { EXPECTED } \
\text { PRICE }
\end{array} & \begin{array} { c } 
\text { EXIPECTED } \
\text { DIVIDEND }
\end{array} \
\hline \mathbf { X } & 1.25 & \$ 20 & \$ 23 & \$ 1.25 \
\mathbf { Y } & 1.50 & \$ 27 & \$ 29 & \$ 3.25 \
\mathbf { Z } & 0.90 & \$ 35 & \$ 38 & \$ 1.00
\end{array}$$
-Refer to Exhibit 7-2. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z)?

Accepted Answer

A)  16.50%, 5.50%, 22.00% 
B)  9.25%, 10.5%, 7.5% 
C)  21.25%, 8.33%, 11.43% 
D)  6.20%, 2.20%, 8.20% 
E)  15.00%, 3.50%, 7.30% 
A)  16.50%, 5.50%, 22.00% 
B)  9.25%, 10.5%, 7.5% 
C)  21.25%, 8.33%, 11.43% 
D)  6.20%, 2.20%, 8.20% 
E)  15.00%, 3.50%, 7.30%

Question 16

The market portfolio consists of all risky assets.

Accepted Answer

A) True 
 B)False

Question 17

Exhibit 7-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \text { Beta } & \text { Current Price } & \text { Expected Price } & \text { Expected Dividend } \
\hline \mathrm{X} & 0.8 & \$ 12.50 & \$ 13.10 & \$ 0.80 \
\mathrm{Y} & 1.1 & \$ 8.25 & \$ 9.76 & \$ 0.20 \
\mathrm{Z} & 2.1 & \$ 25.70 & \$ 30.04 & \$ 0.00
\end{array}$
-Refer to Exhibit 7-4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? $\begin{array}{lccc} 
& \mathbf{X} & \mathbf{Y} & \mathbf{Z} \
\hline  \text { I. } & 4.8 \% & 18.3 \% & 16.9 \% \
\text { II. } & 7.2 \% & 20.7 \% & 22.3 \% \
\text { III. } & 10.7 \% & 17.5 \% & 14.4 \% \
\text { IV. } & 10.1 \% & 12.2 \% & 19.2 \% \
\text { V. } & 11.1 \% & 12.2 \% & 21.3 \%
\end{array}$

Accepted Answer

A)  I 
B)  II 
C)  III 
D)  IV 
E)  V 
A)  I 
B)  II 
C)  III 
D)  IV 
E)  V

Question 18

The planning period for the CAPM is the same length of time for every investor.

Accepted Answer

A) True 
 B)False

Question 19

As the number of securities in a portfolio increases, the amount of systematic risk

Accepted Answer

A)  Remains constant. 
B)  Decreases. 
C)  Increases. 
D)  Changes. 
E)  None of the above 
A)  Remains constant. 
B)  Decreases. 
C)  Increases. 
D)  Changes. 
E)  None of the above

Question 20

Exhibit 7-7
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) (1) Capital markets are perfectly competitive.
(2) Quadratic utility function.
(3) Investors prefer more wealth to less wealth with certainty.
(4) Normally distributed security returns.
(5) Representation as a  K  factor model.
(6) A market portfolio that is mean-variance efficient.
-Refer to Exhibit 7-7. Which are not assumptions of the Arbitrage Pricing model?

Accepted Answer

A)  1 and 3 
B)  1, 2, and 3 
C)  1, 2, and 5 
D)  2, 4, and 6 
E)  All six are assumptions 
A)  1 and 3 
B)  1, 2, and 3 
C)  1, 2, and 5 
D)  2, 4, and 6 
E)  All six are assumptions

Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the

Studies have shown the beta is more stable for portfolios than for individual securities.

Calculate the expected return for D Industries which has a beta of 1.0 when the risk free rate is 0.03 and you expect the market return to be 0.13.

Beta is a measure of unsystematic risk.

Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):

Using the S&P/TSX composite index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

The capital market line is the tangent line between the risk free rate of return and the efficient frontier.

The market portfolio consists of all risky assets.

The planning period for the CAPM is the same length of time for every investor.

As the number of securities in a portfolio increases, the amount of systematic risk

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Exam 7: Asset Pricing Models: Capm and Apt

Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the

Studies have shown the beta is more stable for portfolios than for individual securities.

Calculate the expected return for D Industries which has a beta of 1.0 when the risk free rate is 0.03 and you expect the market return to be 0.13.

Beta is a measure of unsystematic risk.

Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):

Using the S&P/TSX composite index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

The capital market line is the tangent line between the risk free rate of return and the efficient frontier.

The market portfolio consists of all risky assets.

The planning period for the CAPM is the same length of time for every investor.

As the number of securities in a portfolio increases, the amount of systematic risk

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters